If you are considering stock market investment, you must use fundamental analysis method to pick stock.
What is the difference between stock market investment and speculation?
Many people mistaken stock market speculation as stock market investment. When they adopt a buy and sell attitude, they are speculating about the performance of a stock.
They even hope to buy and sell within a day so that they can lock in the profit.
That is why they prefer the technical analysis method. They do not even want to know anything about the stocks they are buying or selling.
That is a speculative approach, and not stock marketinvestment.
Stock market investment is a long term investment. It requires you to know the business of the companies you are investing, and to feel comfortable with the long term perspective of the business.
That is where fundamental analysis comes into play.
What is fundamental analysis?
Fundamental analysis can use either the top down or bottom up approach. The top down approach of fundamental analysis refers to the analysis of the world economic situation, the economy of the country, the industry and the company.
For example, in an economic crisis, you can select the country least affected by the downturn. You can select the industry most resistant to the business downturn. Once you have selected the country, the industry, you can search for the best company in the industry for investing.
Some people do not mind select a good company that is not doing so well in an economic downturn. As long as the company is not bleeding money, and able to weather the crisis, they dare to buy into it. They know that when the economy recovers, the share price will go up.
Many companies are global companies. They are not affected deeply by a crisis in one country. That is why the share price is consistently high.
You need to read the annual report and analysis the financial reports before you take part in stock market investment.
It is better to invest in companies with strong cash flow, strong revenue, and less debt. If thecompany has more debt than asset, something is wrong.
You need to compare the earnings with other companies in the same industry. If the company is not doing as well as the others, it may have problem maintaining the profitability.
Fundamental analysis for stock market investment is a method used by many top investors. Having said that, you have to remember that not all who take part in stock market trading are rational persons.
Most investors and speculators are emotional. They sell away shares of strong companies in a day of stock market panic, despite the fact that those companies manage to outperform many other companies.
That is why you should pay attention to the emotional aspect of stock trading, and never let your irrational fear gets the better of you.
A basic mistake for investors using fundamental analysis is to time the market. There is no absolute low in stock market investment. There is no absolute high in stock market investment too.
As long as the share price reflects a reasonable Price to Earning Ratio, you can go ahead and acquire the stock.
Once the share price exceed the value of the company, that means you think the stock is over-priced, you may consider selling it away.
Scheng1 is a passionate blogger from Singapore. Rich in every sense reveals my deep desire in enjoying life, and be rich in every possible ways. Personal Finance is about money, from making money to investing money. Retirement in Asia contains resources on retirement planning.